In business, how you account for what leaves your bank account is just as important as having money coming in.
Claiming all the expenses you’re allowed to claim ensures you keep your corporation tax bill to a minimum. Which means more of your hard-earned money stays in your pocket instead of going to the taxman.
But while we’re all familiar with the usual suspects — like salaries, office stationery, and insurance — there are many expenses which you could claim but probably don’t. And some expenses you run through your company which you shouldn’t be claiming.
With this in mind, we’ve put together this in-depth guide about claiming expenses as a limited company — what you can and can’t claim, and what to consider when deciding whether it’s you or your company that should pay for something.
Business expenses vs allowable expenses: what’s the difference?
Before we go into specifics, it’s worth noting that, while any costs you incur in the course of running your business are technically business expenses, you can’t claim all of them. To be able to claim a business expense, it must be allowable.
So what counts as an allowable expense?
According to HMRC, it’s an expense you’ve made ‘wholly and exclusively’ for business purposes. In other words:
- The expense was necessary to keep your company running or in order to service your customers
- The expense is partly business and partly personal, but you can show exactly how much of it — this is called the ‘definite proportion’ — was business use. Expenses that have a ‘dual purpose’ — in other words, you can’t separate business use from personal use — aren’t normally allowable and you can’t claim them
Imagine you had a limited company that provided asbestos removal services.
Asbestos is a health hazard, so you need to wear protective equipment in order to do your job safely.
Here, your purchase of protective equipment would be clearly ‘wholly and exclusively’ for business. So it would be an allowable expense.
By contrast, you wouldn’t be able to claim the cost of your suits if you were a solicitor.
Sure, most of your clients probably expect you to wear a suit for meetings. But people wear suits for all sorts of other reasons too, including weddings, funerals, and other formal events. So, in this case, your suit serves a dual purpose and isn’t allowable.
Of course, these examples are straightforward, and the ‘wholly and exclusively’ principle is only a general rule.
In practice, things can get complex and open to interpretation.
More importantly, while expenses that are partly business and partly personal lower your corporation tax, the personal element gives rise to a benefit in kind.
This means you’ll have to pay national insurance and income tax on the personal portion of the expense, and the company will have to pay employers’ national insurance. So, on balance, it may be better for you not to pay for these expenses through your company in some circumstances.
Here’s a look at the main categories of limited company allowable expenses and their tax implications.
What your accountant charges you to do your company’s accounts is allowable. This includes tax-planning advice, Companies House fees, as well as the cost of forming your company in the first place (If you set up your company yourself, or hired a company formation service, you can still claim these costs in full).
Some accountants also roll the cost of preparing your personal tax return into their total fee.
Your personal tax return doesn’t benefit the business. It benefits you personally. So it doesn’t satisfy the ‘wholly and exclusively’ test. For this reason, if your company pays for it you’ll need to declare it as a benefit in kind and pay income tax, national insurance, and employers’ national insurance on it.
Advertising and marketing
You can’t make money unless potential customers know you exist. So advertising and marketing costs are allowable in full.
This includes the cost of building and maintaining a website as well as flyers, brochures, business cards, and other marketing literature.
Banking fees and charges
You can claim the following in full, as long as they’ve been issued in your limited company’s name:
- Bank account charges, including any monthly, transaction, or overdraft fees
- Credit card charges
- Interest on business loans, but not capital repayments. If you’ve taken out a loan to buy equipment for your business, you may be able to claim the cost of that equipment separately (more on this in a minute)
If you donate money, equipment, land or property to a charity or sponsor them, the cost is an allowable expense.
You can also second employees to the charity.
While it might seem like this would pass the ‘wholly and exclusively’ test — after all, you’re trying to woo new clients or keep current clients on side — entertainment isn’t allowable.
The main exception to this is if you host a party to entertain your staff, as long as:
- All, or at least the vast majority of your guests are staff members and their partners
- The purpose of the event is specifically to entertain your staff
- You don’t spend more than £150 per person, including VAT. This is an annual limit. So you can either hold several events that, together, don’t cost more than £150 per person per year. Or you could host one big annual bash that costs £150 per person.
Tools, machinery, or other equipment you need specifically to do your job is an allowable expense.
- Specialised machinery. If you’re a baker, for example, you can claim the cost of buying professional baking ovens
- Vehicles, for example delivery vans. If you buy a company car, HMRC will usually consider it to have at least some personal benefit, so you’ll have to pay personal tax on it. That said, the corporation tax deduction may mean it’s still worth it, particularly if it’s an expensive car
- Rent or lease payments
- Office supplies. This includes stationery, laptops, office furniture, and also your mobile phone (as long as the contract is in your company’s name). While these might seem like they have a dual purpose, they won’t trigger benefit-in-kind tax if you can show that personal use is insignificant
- Uniforms and protective clothing
Depending on which type of business you’re in, your insurance requirements will differ.
If you’re a contractor, for instance, you’ll probably need professional indemnity insurance.
By contrast, if you make or re-sell products, it’s probably worth getting product liability insurance.
Whatever your insurance needs are, if the policy is in your business’ name, it’s usually an allowable expense and you can claim it in full.
This includes the cost of a group medical insurance policy.
That said, because health insurance has a personal benefit, you and any other staff members it covers will have to pay benefit-in-kind tax on it.
If you employ staff, your limited company has to take part in auto-enrolment and contribute to each staff member’s private pension pot.
By law, you have to contribute at least 4% of each staff member’s earnings into a private pension. But the good news is that these contributions are allowable expenses.
If you’re the company’s sole director and employee — or there is more than one director but no employees and none of you has an employment contract — you can ask the pensions regulator to exempt you from auto-enrolment.
That said, it’s still worth paying pension contributions through your company, for two reasons:
- All your contributions are 100% tax deductible, so you’ll pay less corporation tax
- The salary threshold doesn’t apply to your limited company. So while you can’t contribute more than the equivalent of your annual salary into your pension, your limited company can contribute up to £40,000 a year, regardless of how much you pay yourself
Salaries and subcontractors
Your salary, staff members’ salaries, and any subcontractors’ fees are allowable expenses.
Of course, if the salary is over the secondary threshold — in 2021/22 this is £737 a month — your company will have to pay employers’ national insurance and you’ll have to deduct Class 1 national insurance from your and your employees’ salaries. And if your or your employees salaries go over the personal allowance, you’ll also have to deduct income tax.
If you’re the sole employee of the limited company, it’s usually best to limit your salary to the secondary threshold and take the rest of your income as dividends. This is the most tax-efficient way to pay yourself, because:
- You won’t pay any employers’ or class 1 national insurance
- You won’t pay income tax
- At 7.5%, dividend tax is much lower than the 20% basic income tax rate
You can also claim any business expenses which you or your employees have paid out of pocket and you’ve paid back to them, provided they pass the ‘wholly and exclusively’ test.
So if your employees made these expenses ‘wholly and exclusively’ for business, your limited company can pay them back and claim them. But, if they don’t and you pay them back, a benefit in kind will arise.
Subscriptions are allowable if they’re business-related.
This includes membership fees for professional associations as well as software subscriptions. Software subscriptions are allowable if they’re specialised — for example, you pay for Photoshop because you’re a graphic designer — and also if they’re for general business use, like cloud storage or accounting software.
Needless to say, you can also claim the cost of journals and books related to your industry as well as training courses aimed at improving your skills.
Travel and transport
Your limited company can claim the cost of the following:
- Motor insurance, breakdown cover, road tax, repairs and maintenance, and fuel. This is the way to go if you use a company car. But, as we’ve mentioned above, a benefit in kind will also arise. HMRC has a calculator you can use to work this out
- Alternatively, if you or your employees use your own personal car for business journeys, the company can reimburse the cost of business mileage at the HMRC-approved approved mileage allowance rates
- Plane, train, tube, and bus fares
In the case of business mileage, parking, and transport fares, for the expense to be allowable the trip must be ‘wholly and exclusively’ for business.
This means that:
- The drive was an integral part of your job (or of the job of the employee who is claiming), for example because you were delivering an order to a client
- The drive was for business purposes. For example, you were visiting a client or attending a conference. Commuting to and from your usual workplace doesn’t count
If you have to stay somewhere overnight, you can also claim ‘reasonable’ subsistence costs, that is the cost of accommodation and food and drink — the only exception to the rule that meals aren’t allowable expenses.
Working from home
If you work from home and do business as a limited company, you have three options:
Pay yourself using simplified business expenses
This is a monthly payment of up to £26 a month, or £312 a year. The main advantage of this option is that it’s a rate set by HMRC. This means you don’t have to justify it
Work out the business proportion of your expenses
This might result in a bigger deduction. The flipside is that it’s more complicated to do, because as a limited company you must prove that you’ve incurred the costs you’re claiming are a direct result of working from home.
Typically, this means you can only claim a portion of your electricity, gas, and water bills (if your water is metered). You pay the same mortgage or rent and Council Tax regardless of whether you work from home or not, so they’re not allowable
Rent out a room to your company
The third option entails literally becoming your company’s landlord and charging it rent for the use of a room. You’ll need a tenancy agreement and your company must pay rent at the ‘market rate’.
This option could result in a hefty allowable expense. The catch is that, because you’re now using part of your home for commercial reasons, you’ll be technically disposing of a business asset if you decide to sell it. Which means you may have to pay capital gains tax
Benefits or other gifts to your employees (including you) are allowable and don’t trigger benefit-in-kind tax if they:
- Cost £50 or under
- Aren’t cash or a cash voucher
- Aren’t a reward for their work
- Aren’t included in their contract as part of their remuneration package
How to claim expenses through your limited company
If you’ve read this far, you hopefully have a good idea of what you can and can’t claim through your limited company.
But how do you actually claim them?
You have two main options:
- Pay for the expenses directly from your company bank account, or a credit card in your company’s name
In most cases, this is the most practical option. If your limited company is paying your pension contributions, for instance, you’ll need to tell your pension provider about this so they’ll set things up accordingly
- You — or other employees — pay from your own pocket and the company reimburses them
It’s good practice to have an expense policy and reimbursement process in place, especially if you employ several staff. This ensures you stay in control of what everyone is claiming
If what you pay through your limited company results in a benefit in kind, you’ll also have to fill in a P11D form for each employee at the end of every tax year.
The rules around benefits in kind can be tricky and paying benefit in kind tax may or may not be worth it depending on your circumstances. So it’s a good idea to get advice from your accountant. They’ll tell you whether paying from your own money or through your limited company is the better option.
All set. But make sure your records are up to scratch
So there you have it — a list of the main kinds of expenses you can claim through your limited company and how to claim them.
But here’s one parting bit of advice.
While you don’t have to present receipts, invoices, or workings (if you’re claiming an expense that is part business, part personal) when you file your taxes, HMRC may ask to see them. And if they’re not complete, accurate, and readable, you risk getting fined.
With this in mind, make sure you keep good records.
Keep your receipts — including receipts for stuff you or your employees have paid out of your own pocket — organised. And record every transaction.
Or, even better, connect your business bank account to your accounting software. It’ll make everything that much easier.
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